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Monday, February 20, 2012

Industrial Product Life-Cycles

The product life-cycle is a series of different stages a product goes through, beginning from its introduction into the market and ending at its discontinuation and unavailability. These stages are commonly represented through the sales and profit history of the product itself, although there can be many other variables that affect the lifespan of a product line. Between the initial growth and concluding maturity stages, the profit curve usually reaches its peak. During the maturity phase of the life-cycle, sales volumes for an established product tend to remain steady, or at least do not suffer from major declines, but the rate of profit drops.

In most cases, the trajectory and behavior of the product life-cycle is determined by a set of factors over which manufacturers and marketers have little control, forcing them to react to changing circumstances in order to keep their product development strategy viable. These external factors include shifting consumer requirements, industry-wide technological advances, and an evolving state of competition with a company’s market rivals. The fluctuating patterns of a life-cycle indicate that a different marketing and product development approach may be needed for each stage of the cycle. Understanding life-cycle concepts can aid in long-term planning for a new product, as well as raising awareness of the competitive landscape and estimating the impact that changing conditions can have on profitability.

The Life-Cycle Curve

Industrial products usually follow an S-shaped life-cycle curve when sales and profits are plotted over time. However, certain products, such as high-tech goods and commodities, may follow a different life-cycle pattern. High-tech products often require longer development times and higher costs, making their growth stages long and their decline stages short, while commodities, such as steel, tend to have relatively static demand with sales that do not appreciably decline from an absence of competition. Sales would drop, though, from an increase in competing products.

Under most life-cycle conditions, profits typically peak before sales do, with profits reaching their peak level during the early growth stages and sales reaching their peak in the maturity stages. Competition tends to be lower at the beginning of the life-cycle, but as competing companies start to offer lower prices, newer services, or more appealing promotions in the maturity phase, the initial product must be made more attractive. This often results in comparable price drops or increased spending on advertising and promotions, as well as greater investment in distribution and modifications to the existing product. The initiatives improve sales, but drive up costs and lower profits.

The Introductory Stage

After being introduced into the market, a new industrial product will yield varying degrees of acceptance. Some products may find acceptance soon after release, while others may take longer to develop a customer base. One of the reasons for this disparity involves the skill set required to make full use of a new product. Goods that need relatively little training and do not obligate users to learn new skills or refine existing ones typically find market share more rapidly than complex products. A company that introduces a product requiring a high degree of learning and expects a relatively low rate of acceptance can focus on market development strategies to help build consumer appeal. Conversely, products with a low learning curve and a quick route toward acceptance may need a marketing strategy designed to offset rival products, as competition at these levels tends to be higher.

The Growth Stage

When an industrial product enters a period of higher sales and profit growth, the marketing plan often shifts to focus on improvements to the design and any added features or benefits that can expand its market share. Increasing the efficiency of distribution methods can help improve product availability by reaching more customers, and some degree of price reductions, particularly for large-scale operations, can be introduced to make the product more appealing for purchase. Maintaining the higher price set at the introductory stage increases the risk of competitors entering the market due to the wider profitability margin. Similarly, without stronger distribution efforts the product may have limited availability, which encourages rival companies to encroach on market share.

The Maturity Stage

The maturity stage of a life-cycle is characterized by an increase in the number of market competitors and a corresponding decline in profit growth as a percentage of sales. To compensate for the level of saturation that occurs during this phase, the product development strategy revolves around entering new markets, often through exports. It may also be helpful to increase efforts to satisfy existing customers in order to preserve the customer base. Reducing spending on marketing and production can help maintain profit margins.

The Decline Stage

In the decline stage, the competition for product pricing tends to escalate, while profits and sales generally decrease. When working with industrial products, marketers sometime opt to discontinue a product when it has reached this level or introduce a replacement product that renders the previous version obsolete. Marketing and production budgets are typically scaled back to save on costs, and resources may be shifted to newer products under development. Product decline usually proceeds more quickly among industries that rely on rapidly changing technologies, with newer advances periodically driving existing goods out of the market.